Minimum Wage: Extend It or End It?

Today, the U.S. House of Representatives will vote on whether or not to increase the minimum wage. While the law is expected to pass without much difficulty, there’s still plenty of debate on whether the intended effect – more purchasing power for low-skilled workers – is beneficial for the overall economy. Opponents say the increase hurts small businesses and, in the end, prices job seekers out of the market. CNBC's Mark Haines hosted a debate between two analysts this morning on “Squawk on the Street.”

The increase would take the present $5.15-an-hour wage rate to $7.25 an hour over the next two years. The legislation is a key part of the Democrats’ “Hundred Hours for a New Direction” agenda. The Democrats are hoping the momentum that pushed them to a sweep in last November’s elections will help get this bill – and others tackling lobby reform and lower drug prices – passed quickly.

There’s no minimum wage in Hong Kong, and the prosperity there is “tremendous,” says Jim Dorn. He’s a policy analyst at the Cato Institute, and he thinks the U.S. should follow Hong Kong’s lead and let the market set employee wages.

“I think the minimum wage interferes with the free choice in the labor markets,” Dorn says, “and employers ought to be able to pay workers the going market wage rate, which, by the way, is primarily above the minimum wage. So the minimum wage is not a way to really help low-skilled workers. In fact, it will price them out of the market if the wage rate is higher than the prevailing rate.”

According to Dorn, only 15% of minimum wage earners are from low-income families. The rest are young workers living with their parents. A better way of putting money in the pockets of workers is the earned income tax credit for the working poor, he says.

But Dorn is missing a key point, says Dean Baker, co-director at the Center for Economic & Policy Research. The bill won’t just help those making $5.15 an hour – it will help everyone making below $7.25. Three-quarters of that $2.15 band of workers are adults, he says, and almost half are families with children. He says dozens of studies show, and even economists who disagree with the minimum wage agree, that an increase has no negative effect on employment. Baker also scoffs at the idea of wage increases hurting the economy.

“If you want to talk about a prosperous economy, we had a great economy in the ’60s,” he says, “3% unemployment in ’69, the minimum wage was over $8 in today’s dollars. So the idea that we can’t have a minimum wage of $7.25 in 2009, that’s just kind of ridiculous.”

You have to think long term, though, says Dorn. If the minimum wage is higher than the going market rate, then employers will start to make cost-cutting substitutions, such as Wal-Mart’s recent addition of computer software that increases the work-hour flexibility of its employees but cuts down on their overall work-hour totals.

Interestingly, though, Wal-Mart is for the boost in minimum wage. U.S. Representative George Miller, a Democrat from California who is also the chairman of the education and labor committees, appeared on “Squawk Box” this morning, and he said even the retail giant realized the trouble with 13 million people stuck at a 10-year-old minimum wage.

“When Wal-Mart came out and supported the minimum wage increase this year, what they really said was that the people who shop in their stores don’t have enough money to buy the necessities of life,” he says.

Baker of the Center for Economic & Policy Research noted that Wal-Mart pays above the federally mandated minimum wage – as most employers do – but the goal is to get those workers who are underearning in relation to their peers back on a level playing field.